How To Get A Secured Business Loan

Getting a secured business loan works like getting any business loan, just with the added step of providing information about your collateral. Secured business loans can help you achieve lower interest rates or help you get approved if you don’t have the best credit score and finances. But you’ll want to consider all the loan options and lenders to find the best choice for your business. 

Here are the steps you need to take from understanding lender qualifications to applying for the right loan. 

What is a secured vs. unsecured business loan?

One of the many decisions small business owners must make when seeking funding is whether to get an unsecured or secured business loan.

A secured business loan is backed by company assets, which act as collateral to secure the loan. If the business fails to repay the loan, the lending institution can seize the collateral in an attempt to recover some of its losses. Providing collateral on a business loan can help your approval chances, access a larger amount of funding or a lower interest rate.

On the other hand, an unsecured business loan allows you to get a loan without tying the loan to business assets. Despite being unsecured, most business loans require you to sign a personal guarantee. The personal guarantee backs the loan with your personal assets, meaning that the lender can go after your personal assets if you default on the business loan.

Pros and cons of secured business loans

When you secure a business loan with collateral, you decrease risk for the lender. The lender can now use the collateral to pay off the loan if you default, helping it recoup loan costs. In turn, the lender will often reward you for this reduced risk by offering lower interest rates or more favorable repayment terms. 

In addition, collateral can help you get approved for a business loan if your business is in a financial gray area, such as having fair credit.

However, the downside is that the lender can seize business assets if you fail to make repayments. You may lose valuable assets that your business needs to operate. That said, lenders can still go after your personal and business assets even with an unsecured loan, especially if you sign a personal guarantee. 

1. Review your business’s qualifications

Each lending institution sets its own requirements for securing a business loan.However, for secured loans, lenders often relax requirements, accepting businesses with lower annual revenue and credit scores than they would with unsecured loans. 

The reason is that secured loans are less risky for the lender, so it can approve riskier types of businesses. Lenders tend to tighten criteria for an unsecured loan to offset the extra risk of not having collateral.

Lenders may also review your personal and business credit score. A high score could result in getting approved for a higher loan amount and lower interest rate. 

Other factors include how long the company has been in business, the purpose of the funds and the company’s plan for repaying the loan.

2. Calculate how much money you need — and how much you can afford to repay

Knowing how much money your business needs and the monthly amount it can afford to repay will help you compare banks and submit applications. 

For example, if you need $50,000 but can’t afford the payment for a three-year term, you could increase the length of the loan to four or five years. A business loan calculator will help you determine your monthly payment based on the amount borrowed, the loan’s repayment length and its interest rate. 

You’ll also want to determine if you need all the funding at once, as you would if buying equipment or a vehicle. If you need a smaller amount now and the rest later, you may want to consider a business line of credit or business credit card. Both enable you only to make payments on the money you’re currently using and draw the remainder as needed. 

3. Choose your collateral

Businesses can use various assets to secure a business loan, including:

• Cash, including funds held in business bank accounts.
• Investments like stocks and bonds.
• Unpaid customer invoices.
•  Real estate property owned by the business, including buildings and land.
• Business assets such as machinery, vehicles or other equipment.
• Goods or products held by the business as inventory.
•  A blanket lien that grants a lender the legal authority to seize any business assets if the business defaults on the loan.

If you’re using previously purchased property to secure a new business loan, you may need to get the property appraised — though sometimes the lender handles that step.

Lending institutions may require the collateral’s value to match the loan’s amount. For a $50,000 loan, you would need collateral worth $50,000. 

But since the value of some assets like property and equipment is subjective, the bank may place a lower value on the collateral than you would. If this happens, you must come up with additional collateral, increase your down payment or accept a reduced loan amount. 

Some lenders will require a UCC (Uniform Commercial Code) lien, which gives the lender legal claim against an individual asset or as a blanket lien against all business assets. It protects the lending institution if the business files for bankruptcy. Since a UCC lien could potentially put all business assets at risk, this may be another factor to consider when choosing between lending institutions.

Business loan secured by real estate property

You can use real estate or properties your business owns to secure a business loan. However, the lender may not allow you to use a property already backing another loan. 

For example, if you have a commercial real estate loan, the loan is secured by the building or property being financed. If a lender has already placed a UCC lien on that property, you may not be able to use it for another business loan. In this case, you will need to choose another business asset to secure the loan or get an unsecured loan.

Bankrate tip

You may also be able to use personal assets as collateral. Just keep in mind that if you fail to repay your loan, you will likely lose the personal asset.

4. Compare types of secured business loans 

There are options for secured business loans beyond large national banks like PNC Bank, small community banks and credit unions. Online lenders also offer secured term loans, lines of credit and other business loan products.

Consider which type of secured business loan best meets your needs:

• SBA loans: These loans are backed by the Small Business Administration (SBA) and offer longer repayment terms and lower interest rates to small businesses. These loans support  various needs like working capital, expansion and equipment purchases. You may need collateral up to the full amount of the loan, except in cases where collateral is not required, such as for Small loans under $50,000.
• Business term loans:  Term loans offer a lump sum up front that you then repay with interest over a specific term, like five or 10 years. They can be secured or unsecured.
• Equipment financing: Loans specifically designed for purchasing business equipment, allowing businesses to acquire necessary assets while spreading the cost over time. Equipment loans are secured by the equipment being purchased.
• Business line of credit: Provides access to funds up to a predetermined limit to help with short-term expenses. Businesses can withdraw money as needed, and they can borrow again as they pay down past draws and have credit available. You typically secure a business line of credit with cash, and your credit limit is equal to the amount of cash you put down.
• Commercial real estate loans: Businesses looking to purchase or refinance commercial properties can use commercial real estate loans. These may offer long repayment terms up to 25 years and are secured by the property itself.
• Invoice financing: Businesses use their outstanding customer invoices to secure financing, either as a loan or by selling the invoices to the lender. The lender gets paid when the customer sends in the invoices.
• Inventory financing: Uses inventory as collateral, helping businesses acquire or maintain inventory levels for sales and production. The inventory serves as collateral for the loan.

Generally speaking, traditional lenders like brick-and-mortar banks and credit unions offer lower rates, while online lenders offer faster and easier-to-access funding. Make sure to compare both.

Alternative financing options

Not sure if a secured business loan is right for you? Consider these alternatives.

• Unsecured business loans. If you don’t want to put up collateral or don’t have valuable assets, compare the best unsecured business loan options. You won’t need collateral for these loans.
• Business credit cards. Most business credit cards come unsecured and don’t consider your business’s revenue or time in business to qualify. However, you may need strong credit. Plus, depending on the card, you can earn points or cash back for purchases you make with the card.
• Business grants. Business grants offer your business money that you don’t have to repay. You will need to meet qualifications to apply, and you may have to compete with many other businesses. In some cases, you’ll need to give a presentation about your business to the company offering the grant.

5. Compare secured business loan lenders.

Once you’ve nailed down the type of secured business loan you need, you can compare the best business loan lenders. Every lender offers different benefits or specializes in different loans, so you’ll want to compare several features:

• Qualifications to apply
• Interest rates
• Loan terms, whether short- or long-term
• Prepayment discounts
• Fees charged, like origination fees

Consider which lenders offer you the features you need, such as low interest rates or long repayment terms. Then, if possible, pre-qualify with multiple lenders to see what loan terms you qualify for. Prequalification allows you to see interest rates and terms that you qualify for without performing a hard credit check.

6. Gather your documents

Each lending institution requires  documents about you and your business as part of the application process. 

The lender should provide you with a list of its requirements, but common business loan documents include:

• Business plan.
• Financial statements, including balance sheets, income statements, cash flow statements and business debt schedule.
• Business bank account statements.
• Personal and business tax returns.
• Business formation documents.
• Business licenses and permits.
• Legal documents, including lease agreements and third-party contracts.
• Personal information about all owners, including dates of birth and Social Security numbers

7. Complete your applications

Many lenders have online applications, but some traditional lenders require you to apply over the phone or in person. 

Many online lenders offer prequalification, which allows you to see what interest rates and terms you qualify for without a hard check on your credit. If possible, prequalify with multiple lenders to compare offers before you make a final decision. 

If you’re comparing traditional banks, you may have to submit a full application to see the loan terms. But nothing is final until you sign the loan agreement.

Once you’ve submitted your application, the lender may take a few days or up to several weeks to approve the loan and offer you a loan agreement. In general, online lenders take less time for loan approval than traditional banks.

The bottom line

Secured business loans provide a viable financing option for businesses in certain situations. By offering collateral like real estate, equipment or inventory, businesses could access more funds at lower interest rates or with longer repayment terms. But it’s necessary to evaluate the risks involved and ensure you can make repayments to avoid potentially losing assets.

Frequently asked questions